Regulatory concerns about risk layering on interest-only mortgages may be overblown, according to an analysis of subprime IO adjustable-rate mortgages by Friedman, Billings, Ramsey & Co.FBR researchers reported that 10.4% of subprime IO ARMs are underwritten with low documentation and high loan-to-value ratios. And only 5% of subprime IO ARMs have an additional risk layer (debt-to-income ratios of 30% and higher). Loans with four or five risks account for only 1.3% of securitized subprime IO loans. "Therefore, we conclude that the layering of risk occurs among a small proportion of interest-only loans, which represent only 19.5% of all subprime loans," said FBR managing director Michael Youngblood. The researchers did not look at payment-option adjustable-rate mortgages because they represent less than 0.1% of securitized subprime loans. FBR's asset-backed securities research paper also says subprime lenders appear to be allowing borrowers with higher credit scores to obtain interest-only loans and steering those with lower scores into fully amortizing loans. In December, federal banking regulators issued proposed guidance that raised concerns about risk layering on IO and payment-option ARMs. The comment period ended March 29, but the regulators have not signaled when they are likely to issue final guidance.

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